Greece votes "no"

Rates

On Friday, US markets were closed because of the 4th of July holiday. Ahead of the Greek referendum, Bunds moved higher. Trading was very light though, only 406K contracts traded or 30% below average, which might have exacerbated the move. There was no strong explanatory trigger available to our knowledge. As peripheral spreads barely budged and the fall in equities and the rise in EUR/USD were modest, we can’t with certainty qualify the Bund rise as pre-referendum risk-off action. Eco data didn’t play a role. The June EMU services PMI was reported unrevised, while May EMU retail sales were marginally stronger than expected (0.2% M/M instead of 0.1% M/M). In a daily perspective, the German yield curve bull flattened with declines between -0.4 (2-year) and -8.2 bps (30-year).

Greece and FOMC speakers key this week

Today, all attention will go to the outcome of the Greek referendum. The eco calendar is very thin with only the June US Non-manufacturing ISM and the EMU Sentix investor sentiment index. The market expects a small uptick of the headline ISM index to 56 from 55.7. Stronger consumer and business spending and lower gasoline prices point to a strengthening of the headline index, but as regional indices were mixed, the advance might indeed be small. The Sentix investors’ sentiment is expected to have fallen to 15 in July from 17.1 previously. It isn’t a market mover, but given the bad performance of equities recently due to uncertainty on Greece, the decline might even be more outspoken.

Later this week, the eco calendar remains unattractive in both the US and EMU. More attention will go to the multiple speeches of Fed governors throughout the week starting on Wednesday, with Yellen’s appearance on Friday the most important one. Also the release on Wednesday of the Minutes of the 16/17 June Fed meeting might be interesting even if it is unlikely the Fed will hike rates at the July meeting. The ECB debates today on the ELA.
Regarding supply, the US Treasury holds its mid-month financing operation with the 3-, 10- and 30-year auctions (Tuesday to Thursday) which might be a negative for US Treasuries, while in EMU, only Germany (Schatz, €4B July 2017) and Austria (RAGB) tap the market.

The “No” at the Greek referendum complicates policymaking and brings a Grexit a giant step closer to materializing. We expect policymakers to try once more to find a modus vivendi with Greece, starting at tomorrow’s Eurogroup meeting and EU Summit. Europe wants a deal with strong conditionality, while Greece rejected conditionality at the referendum. Is it reasonable to expect PM Tsipras to accept now austerity? An agreement on debt restructuring might be used as sweetener with Tsipras said to ask a 30% haircut. However, the absence of trust in the Greek government make many countries reticent to go down that road, as they will be very suspicious on whether or not the Greek government may effectively take any promised measures. The ECB may keep the ELA ceiling at current levels today, but raise the haircut on Greek collateral. If no speedy deal is found, it’s the ECB that may pull the trigger by stopping or tapering the ELA lending, which would result in a collapse of the banking sector, the issuance of IOU’s by the Greek government and finally the printing of a new currency. For a full review of the consequences of the Greek referendum, see our Flash report.

Overnight, Asian equity markets trade up to 2% lower following the outcome of the Greek referendum. Chinese stocks opened around 8% higher on huge policy action to underpin the stock markets, but the initial optimism faded and Chinese stocks are currently 5% lower! The US Note future is significantly higher, profiting from safe haven flows and Friday’s performance of the Bund (US markets were closed).

Regarding trading today, the Bund is set to open strongly on the outcome of the referendum. In line with our view after the referendum was called, we believe short term Bund strength might eventually be used to short the contract, preferably around 0.50% for the 10-yr Bund yield. Our view is similar for the peripheral markets: short term, risk-off, spread widening could be an opportunity to increase exposure to the region.

In the US, the non-manufacturing ISM will be released. We side with consensus and go for a marginal increase. Overall, US Treasuries trading will be dominated by global sentiment. Following last week’s data, we hold our September rate hike call. Increased global volatility is a risk factor. A move towards the upper bound of the recent ranges, could be used to short Treasuries.